LEGAL GUEST BLOG -- JOSHUA J. STRICKLAND

Ohio Legislature revises statutory duties of care and loyalty... again

Blog Entry: March 14, 2013 4:30 AM | Author: JOSHUA J. STRICKLAND

Joshua J. StricklandMr. Strickland joined Dworken & Bernstein in 2010 and splits his practice between the firm's business and commercial litigation department, business transactional department, and his practice in Federal Indian law.

On March 22, 2013 the Ohio legislature's revisions to the limited liability company operating agreement statute, R.C. §1705.081, will go into effect. For those who saw my blog article last year on the changes to the corporate and LLC statutes, you will realize that the legislature revised this statute just last year. Now, realizing that they created substantial confusion, the legislature has made further alterations which bring some clarity.

R.C. §1705.081 deals with what an operating agreement cannot do. Among the restrictions contained in the statute are eliminating or reducing the duties of care and loyalty. The revisions to the statute will change the restrictions so that you cannot eliminate the duty of care whereas the previous restriction prohibited “unreasonably reducing” the duty of care. What constituted an “unreasonable reduction” in the duty of care was not made clear. This change makes it clear that the members in an operating agreement can define the duty of care and can reduce it so long as the duty remains. What limitations will be possible are not yet clear.

Also, the duty of loyalty is being amended to allow an operating agreement to contain specific carve outs for activities that the members or managers agree do not violate the duty of loyalty. The statute as amended last year required listing “specific categories of activities” and set a “manifestly unreasonable” standard for determining whether or not those categories violated the statute. The prior standard proved confusing with no guidance on what activities would be considered “manifestly unreasonable.” As such, the legislature has removed this language reverting to the established standard of simply allowing the members to agree on what activities are permitted.

This statute underscores the importance of a carefully drafted operating agreement and the advice of an experienced attorney to advise the members or managers on these duties.

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